Summer Fun with Biotech and Real Estate

  • SumoMe

Studies suggest that buying an upside breakout can be a good strategy.  It sure can be scary though.  There is always that underlying fear of looking like “the last fool in” if the security in question experiences only a false breakout and then reverses back to the downside (and I hate it when that happens).  Still, for a stock to go from $50 to $100 it first has to go to $50.01, then $50.02, etc.

(See also Live by the FAANG, Die by the FAANG)

Buying into an impending breakout can be an even dicier proposition since this involves buying into what is essentially a “topping formation.”  I recently wrote about consolidation patterns in biotech and real estate.  These sectors appear to be getting closer to a resolution.  Consider tickers XBI (biotech ETF) and IYR (real estate ETF) as shown in Figure 1.

1Figure 1 – Biotech and Real Estate (Courtesy AIQ TradingExpert)

XBI appears to be breaking out to the upside – at least for now.  IYR is close to breaking out – however, one could look at it in an exactly opposite manner and claim that it is “running into resistance near the old highs and therefore may be forming a top.”

Ah, the eye of the beholder.

A Seasonal Play in Biotech and Real Estate

It is pretty widely known at this point that the summer months tend not to be very favorable for the stock market overall (although July of this year might be an exception to the rule).  But biotech and real estate often provide a summer trading opportunity.

The seasonally favorable period extends from:

*The close on June trading day #17 (6/23/2017 this year)

*Through the close on July trading day #21 (7/31/2017 this year)

Figure 2 displays the growth of $1,000 split evenly between ticker FBIOX (Fidelity Select Biotech) and ticker FRESX (Fidleity Select Real Estate) every since 1989 during this period.

2Figure 2 – Growth of $1,000 split between FBIOX and FRESX during seasonally favorable summer period (1989-2016)

Figure 3 displays a summary of the results since 1989.

Measure Result
# Years UP 22 (79%)
# Years DOWN 6 (21%)
Average All Years +3.3%
Average UP Year +5.0%
Average DOWN Year (-2.9%)
Best UP Year +14.9% (2009)
Worst DOWN Year (-4.3%) (2004)

Figure 3 – Summary Results

(See also One Good Reason NOT to Pick a Bottom in DIS)

One thing to  note is the lack of downside volatility despite the fact that both biotech and real estate can be quite volatile (worst down period was -4.3% in 2004).

Year-by-Year Results Appear in Figure 4.  For comparisons sake the annual performance for the Dow Jones Industrials Average (DJIA) during the same period is included.

Year FBIOX/FRESX DJIA Diff
1989 4.8 5.1 (0.3)
1990 2.8 2.1 0.7
1991 5.8 3.6 2.2
1992 7.0 3.2 3.7
1993 0.8 2.1 (1.3)
1994 (0.6) 1.8 (2.4)
1995 3.5 2.7 0.8
1996 (4.1) (4.1) 0.1
1997 2.9 6.4 (3.5)
1998 1.8 2.2 (0.5)
1999 4.4 (0.1) 4.5
2000 0.3 1.1 (0.8)
2001 (3.6) 0.1 (3.8)
2002 (1.5) (4.9) 3.4
2003 8.0 1.0 7.0
2004 (4.3) (2.9) (1.4)
2005 9.6 2.1 7.5
2006 4.0 1.8 2.2
2007 (3.2) (1.0) (2.1)
2008 6.7 (1.9) 8.6
2009 14.9 10.0 4.9
2010 2.0 1.6 0.4
2011 3.0 0.8 2.2
2012 5.7 4.0 1.7
2013 12.6 5.2 7.5
2014 1.1 0.4 0.7
2015 0.6 (2.2) 2.8
2016 8.6 2.3 6.2

Figure 4 – Annual Results for FBBIOX/FRESX during seasonally favorable  summer period versus Dow Jones Industrials Average

For the record,during the seasonally favorable summer period:

*The FBIOX/FRESX combo has outperformed the Dow in 19 out of 28 years.

*$1,000 invested in FBIOX/FRESX grew to $2,440

*$1,000 invested in the Dow Industrials grew to $1,505

Summary

So is biotech and real estate the place to be in the month ahead?  Well, that’s “the thing” about seasonal trends – there’s no way to know for sure what it’s going to be “this time around.”

On a cautionary note, it should be pointed out that the FBIOX/FRESX combo has registered a gain during the seasonal summer period – and outperformed the Dow – in each of the last 9 nine years.

So is it “Away We Go” or this the year that “Murphy’s Law” exacts its revenge?  As always, time will tell.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

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